Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting
AbstractFor a wide class of infinitely lived agent models, Christophe Chamley (1986) has shown that the optimal capital income tax rate is zero in the long run. Robert E. Lucas (1990) has argued that, for the U.S. economy, there is a significant welfare gain from switching to this policy. This paper shows that, for the Bewley class of models with incomplete insurance markets and borrowing constraints, the optimal tax rate on capital income is positive, even in the long run. Therefore, cutting the capital income tax to zero may well lead to welfare losses. Copyright 1995 by University of Chicago Press.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Political Economy.
Volume (Year): 103 (1995)
Issue (Month): 6 (December)
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Other versions of this item:
- S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
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